University Finance Report: Hypothesis Testing and Portfolio Analysis

This report analyzes the performance of two investment portfolios, one constructed randomly and the other using technical analysis. The study tests the weak-form efficient market hypothesis using a t-test to compare the returns of the portfolios. The analysis reveals significant differences in returns, indicating that the technical analysis-based portfolio outperformed the randomly selected one, suggesting that market information impacts stock returns. The report also explores valuation methods, specifically the price-earnings (PE) ratio and PEG ratio, to assess the fair value of equity, and provides a comparative analysis of Bayer's PE ratio. The findings are compared to previous research on the efficient market hypothesis, highlighting the limitations of the theory and the potential for outperforming the market through informed investment strategies. The report concludes with a discussion on the implications of these findings for investors and the importance of considering market information in investment decisions.

HYPOTHESIS TESTING AND ESSAY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Part A...............................................................................................................................................1
(a&b) Calculation of aveage monthly logarithmic return of portfolio A and B..........................1
© Development of hypothesis...................................................................................................12
(d) Application of T test............................................................................................................12
(f) Discussion of findings..........................................................................................................12
(G) Comparison of results with previous research....................................................................13
Part B.............................................................................................................................................13
Valuation approaches for computing fair value of equity.........................................................13
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16
Table 1Portfolio A and B.................................................................................................................1
Table 2Price earning ratio of Bayer...............................................................................................14
Figure 1Porfolio A return................................................................................................................2
Figure 2Portoflio B stocks...............................................................................................................3
Figure 3Portfolio A and B comparison............................................................................................3

INTRODUCTION
Stock market is emerging as one of the important source from which investors make good
amount of money on investment. In the current report, different portfolios are prepared, one of
them is prepared by taking stocks on random basis and other one is prepared by using technical
analysis charts. By using t test weak efficient market hypothesis theory is tested. In second part
of the report, PE ratio is computed and recommendation is made to the Monsanto investors.
Part A
(a&b) Calculation of aveage monthly logarithmic return of portfolio A and B
Figure 1Portfolio A and B
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Interpretation
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-0.04
-0.03
-0.02
-0.01
0
0.01
0.02
0.03
0.04
Portfolio A
Figure 2Porfolio A return
It can be observed that return of the randomly selected portfolio is fluctuating consistently. This
fluctuation is observed regulalrly as on monthly basis if return is increasing then in other month
it will suerly decline. It can be said that random selection of stocks is very dangerous task and
one must avoid stock selection on random basis. Rational investors always prepare some of the
important base for making decisions and by considering same must make decision in respect to
making investment in specific stock.
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0
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12
Portfolio B
Figure 3Portoflio B stocks
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It can be seen from chart given above that portfolio that is created by taking in to account
technical indicators is generating good return for the investor. Return is increasing at fast rate on
the chart and then slightly value declined to some extent but again it rose to specific level. It can
be said that sudden fluctuations are observed in case of reutrn of portfolio B but most of time
return increased consistently on the portfolio.
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-0.04
-0.02
0
0.02
0.04
0.06
0.08
Chart Title
Portfolio A Portfolio B
Figure 4Portfolio A and B comparison
It can be observed from the chart given above that rate of change in return is high in case
of portfolio B then A. It can be seen that higher amount of return is generated by portfolio B then
portfolio A and due to this reason it can be assumed that if stocks are not selected randomly then
in that case good amount of return can be made on the stocks. There are number of methods that
can be used for stock selection. In this regard, some of the technical analysis charts can be used
and different patterns can be identified on them (Van Rooij, Lusardi. and Alessie, 2011). On that
basis best time to make purchase can be identified and it can also be find out that what will be
best time to sold the stocks.
NMC Health
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FTSE Line Fit Plot
NMC Health
Predicted NMC Health
FTSE
NMC Health
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Rentokil
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FTSE Line Fit Plot
Rentokil
Predicted Rentokil
FTSE
Rentokil
ITRK
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FTSE Line Fit Plot
ITRK
Predicted ITRK
FTSE
ITRK
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DCC
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